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TOKYO (Reuters) - Japan's Toshiba Corp tumbled to a quarterly loss and warned it would post its first annual operating loss in seven years this business year due mainly to its struggling chip business.

Toshiba, the world's No. 2 maker of flash memory known as NAND, and its rivals are struggling in a near two-year sector downturn, hit by chronic oversupply, price falls, and weak demand for chips used in digital cameras and portable music players.

Worldwide sales of flash memory are expected to have fallen 33 percent in October-December from a year earlier, according to research firm iSuppli.

Industry leader Samsung Electronics Co posted its first ever quarterly loss this month, partly due to its weak chips unit.

Toshiba and its U.S. partner SanDisk Corp have cut chip output to cope with the downturn.

The global economic dowturn has also pushed Toshiba's digital products and home appliances divisions into the red, although its segment including nuclear reactors stayed in the black.

Toshiba reported an operating loss of 158.8 billion yen ($1.76 billion) in October-December, against a profit of 42.1 billion yen a year earlier. Its quarterly net loss was at 121.1 billion yen on sales of 1.49 trillion yen.

It slashed its annual earnings forecast and warned of an operating loss of 280 billion yen in the year to March, compared with its previous forecast for a 150 billion yen profit.

That is far worse than the consensus estimate for a loss of 67.5 billion yen, according to a poll of 16 brokerages by Reuters Estimates ahead of the quarterly results.

Toshiba also said on Thursday it planned to buy part of SanDisk 300 mm wafer-line production facilities for 80 billion yen ($888 million).